A wealth of opportunity in super

As long-time MLC boss
Steve Tucker
heads off into the sunset, consider what’s behind
Cameron Clyne
’s line that MLC has “opportunities to improve" and Clyne’s previous comments that
National Australia Bank
overpaid for MLC.

That much is obvious. As Clyne has said, MLC has been a serial drag on return on equity. While all the banks’ wealth management businesses have underperformed in recent years – they are a play on equities as both customer numbers and invested funds rise with markets – MLC has been dusted by both
Westpac
’s BT Financial Group and
Commonwealth Bank
’s Colonial First State.

Tucker drove the market in the necessary shift from opaque commissions to upfront fees, square in line with Clyne’s “more give, less take" strategy, but that also contributed to lost share.

MLC’s refusal to pay commissions and volume-based rebates to financial planners helped NAB’s share of investment administration fall from 21.4 per cent in 2000 to 17 per cent by the end of 2012, while BT’s rose from 8.3 per cent to 21 per cent and assets under administration swelled from $9.6 billion to $93 billion. CFS went from 7.5 per cent market share to 14.3 per cent.

That, however, is likely to be a transitory weakness as the industry moves MLC’s way. Of more import is something Clyne mentioned in passing: “when [MLC] was acquired, there were probably pretty significant aspirations for it, particularly about the benefits it would get of being inside a bank".

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Much has been made of NAB overpaying for MLC when it bought it from Lend Lease in 2000 for $4.6 billion, nearly 25 times earnings at a time when NAB was trading at just over 10 times. NAB had been the underbidder for Colonial and its First State business, for which CBA paid $9.1 billion, also more than 20 times earnings (albeit Colonial also had a bank).

Having missed Colonial, and NAB’s due diligence team reckoned CBA paid about 15 per cent more than they could justify, then NAB boss Frank Cicutto was determined not to miss MLC. Critical to the full price was the factoring in of synergy benefits and revenue opportunities from integrating the bank and the wealth manager, but Cicutto never went ahead with the integration.

Clyne said in his strategy update that “what’s also pleasing is the integration [with] the bank is good with a strong growth of 11 per cent compound in referrals through the bank channel. We see that as being a particular area of growth going forward."

“Good", of course, is a euphemism for not good. Take as just one symptom that NAB’s share of small business lending is 25 per cent but its share of small business superannuation is just 5 per cent. NAB has also been left standing on the platform as the self-managed super fund gravy train has steamed off.

To be fair, this wasn’t just another example of Cicutto’s destructive caution. There have been many supporters over the years of the argument that bankers and financial advisers are so different that wealth management businesses should be kept distinct.

Financial advisers certainly think so. And while the focus of the customer relationship for a bank is the customer, for a wealth manager the critical relationship is with the financial advisers, because they are the key distribution point to cohorts of final customers. Integrate poorly and you risk the defection of large numbers of advisers.

NAB board veteran
Geoff Tomlinson
knows this lesson well and as chief executive of National Mutual he battled to keep the business – and its advisers – distinct from the French parent AXA. Life companies like NatMut relied on their own adviser distribution base.

The issue is that such a strategy not only compromises the efficiency benefits but makes it difficult to sell into the bank customer base – something BT and CFS have done very well with greater integration.

There has been virtually no senior staff transfer between MLC and NAB, although former retail head and now technology integration boss
Lisa Gray
comes from NatMut. At CBA, Colonial was worked into the banking division with much better success at cross- selling and more staff transfers.

“MLC remains a Sydney institution with virtually an offshore parent in Melbourne which doesn’t know it very well at all," says one NAB insider. “My sense is at Colonial they don’t think they’re employed by anyone other than CBA, they’re part of wealth management which is a division of the bank."

Being bolder in integration – if NAB can do it without alienating too many advisers – opens up not just cost opportunities but the selling of bank products to wealth customers and products like superannuation into the small business sector.

A complication is the capital implications of banks owning wealth managers under new Basel – and hence Australian Prudential Regulation Authority – standards, particularly those relating to financial conglomerates.

That, however, is a structural issue. It may involve removing advisers from an insurance structure, for example, and it may mean CBA and perhaps NAB lose some capital advantages. There’s a view that there is double counting of capital going on with wealth management, particularly at CBA. Some analysts argue there will also need to be more write-downs on the goodwill which came with original acquisitions.

But the fundamental reason for banks paying high multiples for wealth managers remains: national savings are shifting from bank deposits to superannuation and will continue to do so despite the renewed fondness for deposits.

Clyne knows this is crucial. In his strategy update he emphasised the challenge and opportunity of an ageing population, which means higher usage of wealth products, and the $1.4 trillion superannuation industry. New wealth boss Andrew Hagger has a huge role.

Nor is it business as usual at ANZ. Chief financial officer
Shayne Elliott
’s comments to my colleague Mike Smith (no relation to Elliott’s boss) emphasised, internally and externally, that
Mike Smith
(ANZ’s boss, not my colleague) is more interested in return on capital than empire expansion.

ANZ’s Smith flagged this in an interview with The Australian Financial Review on his fifth anniversary last year, emphasising that his effort in the innards of the bank, on how it is run and uses capital, is as important as Asia.

Elliott’s point that the core Australian and New Zealand banks will get relatively more capital and parts of Asia relatively less is all about this. Asia is the “alpha" for ANZ, the excess returns, but Australia and New Zealand are the core. ANZ across its footprint is also more corporate than retail relative to Westpac and Commonwealth Bank and in recent history retail has been higher margin.

So ANZ needs a tighter cost focus and more rigorous use of capital to span the current portfolio disadvantage. ANZ’s partnerships in Asia, in China, Malaysia, Indonesia and the Philippines are also capital intensive. Expect them to be treated less generously – or even sold – than ANZ branded businesses in Asia over the next few years.

Partnerships served their purpose as beachheads, building local knowledge, but some, such as Tianjin in China, are not progressing and are not capital efficient. Nor is corporate lending, which is why ANZ is building its transaction and debt capital markets business.

Smith is also still working through removing remnant “fiefdoms" at ANZ from the days when his predecessor John McFarlane broke the bank into a couple of dozen specialist businesses to improve focus. A downside of that was a lack of central control, particularly over capital.

This doesn’t mean the Asian strategy is on ice. In the wake of ANZ’s rapid rise up the corporate banking ranks in Asia, where industry monitor Greenwich now ranks it number four overall and two in customer relationships, head of Asia Alex Thursby said in an internal note “top three is now in sight. We can do this".